Bailout Takings Cases

One might assume that “takings” would be a remote issue when it comes to the federal bailout of the automobile and financial services industries during the economic crisis of a few years ago. After all, if the government spent billions of taxpayer dollars to protect particular companies, and the economy as a whole, from going over a cliff, how could the government be accused of taking anything? But if one made this assumption, one would turn out to be wrong. Two ongoing cases illustrate the point.

In A & D Auto Sales Inc. v. United States, the U.S. Court of Appeals for the Federal Circuit recently allowed a group of former automobile dealers with General Motors and Chrysler to proceed with a claim that the United States took their franchises by requiring that the companies terminate them as condition of handing out billions of dollars to keep the car companies alive. According to the allegations in the complaint, the government wanted to see the dealer networks reduced in size so that the companies would be economically viable over the long term, in order to justify the investment of taxpayer dollars. The claims court declined to dismiss the dealers’ takings lawsuit and the Federal Circuit, hearing the case on an interlocutory appeal, issued a decision on April 7, 2014, allowing the suit to proceed, at least on a tentative basis.

The Federal Circuit recognized that one of the plaintiffs’ major obstacles will be that, in order to prevail on the merits, they will need to show that they suffered some economic injury at the hands of the government. If the auto companies were going to collapse in the absence of taxpayer assistance, bringing the entire dealership network down with them, it is hard to see how the government’s financial assistance to save at least some (but only some) of the dealers could have resulted in a taking. The Federal Circuit gave the plaintiffs leave to amend their complaint on remand to assert economic injury, but the plaintiffs are clearly going to have a difficult challenge going forward. Or at least we taxpayers can hope so!

More interesting and more troubling was the Court’s analysis of the issue of whether the government’s offer of financial assistance could result in a taking of the dealers’ private property rights in their contractual arrangements with the automobile companies. This issue points to the hoary Omnia decision, and complex questions explored in detail here. Suffice it to say that the Federal Circuit ruled that the dealers could point to cognizable property interests in their agreements with the car companies and they were entitled to proceed to attempt to demonstrate a regulatory taking of those interests. Resolution of the takings issue, the court indicated, should turn on whether the government action was “direct and intended” (as opposed to merely collateral and unintended) and, if so, whether “the government’s influence over the third party was coercive rather than merely persuasive.” Clear enough? Not so much.

The other case, Fairholme Funds Inc. v. United States, still at a relatively early stage, involves a takings claim by holders of preferred stock in Fannie Mae and Freddie Mac. They allege that decisions by the federal conservator overseeing these giant (but temporarily insolvent) mortgage finance companies took their property rights to dividends from the companies and their share of proceeds from any eventual liquidation of the enterprises. Before it can even get to the takings question the U.S. Court of Federal Claim will have to grapple with several esoteric questions, including whether the conservator, the Federal Housing Finance Agency, can properly be treated as an arm of the United States for takings purposes, and whether the plaintiffs have standing to proceed with the suit. If it ever gets to the merits of the case, the court will have to address the central issue in all these bailout cases: how can the government’s administration of a bailout be a taking if the plaintiffs would have lost everything if the government had not stepped in at all? Plaintiffs succeeded this spring in fending off a government motion to dismiss the suit with a request to conduct some discovery, and obtained an order allowing them to at least prolong the case. This should be interesting to watch.